Does Fund Managers’ Absence from the Rally Signal an Upside?

BAML survey and fund managers

BAML (Bank of America Merrill Lynch) conducted a survey that polled 239 global investors with $664 billion in total assets under management between March 8 and March 14.

One of the survey’s key findings was that the allocation to global stocks had fallen to its lowest level since October 2016. Fund managers are now just 3% overweight on equities compared to 6% last month.

Does Fund Managers’ Absence from the Rally Signal an Upside?

Markets rally in 2019

These data are interesting given the fact that the markets have mostly been on an upward trend in 2019 even though prominent investors aren’t buying into the rally. As of March 19, the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) have risen 13%, 11%, and 16.1%, respectively, year-to-date. The ongoing negotiations between the United States and China (FXI) and the Fed’s shift from a hawkish to a dovish tone have been the major drivers of the market’s optimism after a terrible fourth quarter.

Fund managers’ absence from the rally

Fund managers, however, don’t seem to be as optimistic as the markets. According to CNBC, BAML’s chief investment strategist, Michael Hartnett, said, “The pain trade for stocks is still up.” He added, “Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities.”

While the current caution in the market could mean that there’s an upside in the future, BAML’s bull-bear indicator is in “neutral” territory.

Other allocations

In contrast to overall equity allocation, allocation to emerging market equities (EEM) rose to 40% overweight from 37% overweight last month.

As opposed to equities, investors’ allocations to cash remain high at 40% overweight compared to the historical long-term average of 20%. Typically, cash allocations rise when investors are bearish on the prospect of risk assets.